Since its founding in 2011, the Honest Company has managed to tick all of the boxes required for a seemingly successful tech startup: regular coverage from tech-centric outlets like TechCrunch and Recode; regular appearances on the tech conference circuit; a celebrity co-founder in Jessica Alba, who helps build the necessary hype; money from the hottest venture capitalists; and a $1.7 billion valuation, landing it the coveted status of unicorn.
“Technology is in our DNA,” Honest CEO Brian Lee tells Fortune.
The only problem is that Honest Company doesn’t make or sell technology. It sells diapers and toilet bowl cleaner, hand sanitizer and laundry detergent—all marketed as greener and less toxic than their mainstream equivalents. The tech company label stems from how Honest historically sold its goods—primarily direct to consumer through its website—rather than what it sells. (The company does sell in stores including Whole Foods, Costco, and Target.) But whether that’s enough to merit the “tech” qualifier is debatable. For the record, Lee says, "We don’t really think of ourselves as either. We’re a way of life."
Meanwhile, Seventh Generation, a company Fortune recently profiled, peddles very similar stuff but gets relegated to the far less sexy category of “consumer goods" company. Does that labeling distinction—tech vs. consumer goods—really matter? There's a strong argument that it does. Fortune's Erin Griffith tackled this topic in an October column in which she outlined some of the issues that can crop up when these two worlds get blurred:
There’s an obvious danger in consumer packaged-goods companies acting like they’re high-growth technology startups: Software is scalable; physical stuff is often not. The pressures of achieving software-style hypergrowth with a traditional business can create dangerous incentives.
A quick face off between Honest and Seventh Generation is instructive here. Honest took in tech-level funding—$228 million in five years, while Seventh Generation raised less than $100 million in its nearly 30-year history. Honest also staffed up like a startup. It has about three times as many employees as Seventh Generation, despite having roughly the same level of sales.
Maybe staffing and funding wouldn’t matter quite so much if the home care category wasn’t such a low-margin one. Seventh Generation, which lost money for more than a decade before turning a profit, is set up to run its business under those kinds of pressures. It’s based in Burlington, Vt., has 130 employees, and has almost 30 years of experience trying to make its products more efficiently and effective.
The Seventh Generation way of operating ended up being a selling point. Unilever bought the home care company for a reported $600 million to $700 million in cash this fall. That came after The Wall Street Journal reported that the multinational giant was in talks to acquire Honest.
Honest Company, despite being in a low-margin business, was built more like a high-growth, high-margin operation with its staffing levels and funding. But selling direct to consumer is expensive; just consider the economics of shipping a heavy bottle of a $3.95 dish soap all the way across the country. The soap is already a low-margin item, and now a chunk of that profit has vanished into transportation costs.
Lee, however, says that Honest’s margins “are probably some of the strongest in the industry” but that “it’s not so much about the margins for us. It really is about getting our products into homes in any way we can.” Lee declined to comment on the company’s profitability.
Women’s Wear Daily reported earlier this month that Honest is cutting 80 jobs, or about 14% of its workforce, with the bulk of the cuts coming from the closing of a call center as it moves to an automated online system. Honest's CFO and COO David Parker is departing, as is co-founder and president Sean Kane (he’ll become an adviser).
“It’s a positive move in that they’re right-sizing their operation to adapt to a leaner strategy,” says Martin Okner, who specializes in branded consumer goods for strategic advisory firm SHM Corporate Navigators, “but companies right-size their workforce when there’s an issue. Despite the fact company has said there’s no issue, I would find that hard to believe.”
Lee contends that these cuts and departures don’t signal problems. But at a minimum, they suggest Honest is in some ways pivoting (to use a favorite Silicon Valley word). The company has said it wants to increase its footprint in retail and has expanded into higher-margin categories like beauty, although Lee says that move is a response to customer demand, not an attempt to grow its margins.
“They were valued at 'category disrupter' but when that thesis didn’t play out, they’re retrenching,” says Okner. "They're now looking at themselves as traditional consumer products player.”
That could mean behaving a bit more like rival Seventh Generation, and that may not be a bad thing. Honest, like all startups that take in funding, will eventually need an exit. Ironically, Seventh Generation, the non-tech operation, is the company that’s already found one.